Carmen Dahl

The Impact of Changes to Environmental Legislation on the Property Industry Changes in existing legislation or adoption of new legislation affecting the property industry are usually implemented in order to regulate new developments. Whilst these changes may easily be integrated into new projects, the industry is finding meeting new compliance standards increasingly problematic for existing building stock; predominantly due to the need for significant and/or complex structural or infrastructure modifications and associated capital expenditure requirements. If property owners / operators do not keep up to date with legislative changes they run the risk of a property becoming non-compliant, non-competitive or possibly even obsolete. Examples of European and Local legislative changes which have had a significant impact on the property industry are outlined below: A European Example: One of the greatest influences on the property industry in recent years has been the EU Energy Performance of Buildings Directive, which forms part of the Community initiatives on climate change and aims to reduce energy consumption by improving energy efficiency. One of the key requirements of the Directive is for energy performance certificates (EPCs) to be provided for buildings upon sale, rental or construction. The introduction of EPCs has already had an impact on the commercial rental market, where existing building stock is struggling to compete with new buildings and newly refurbished properties as prospective tenants consider the potential for reduced overheads from more energy efficient premises. Looking to the future, as further energy efficiency legislation is introduced in order to meet EU commitments there is a danger that enthusiastic regulators may underestimate the impact of new legislative requirements on existing building stock, where refurbishment will be the key tool to improving energy efficiency and reducing emissions. This is of particular concern in the UK where the percentage of new builds within total building stock is less than 2% per year and where a commitment has been made within the Climate Change Act 2008 to reduce greenhouse emissions by 80% by 2050. In an article for the Modern Building Service Journal Hywel Davies from CIBSE puts the UK situation into perspective “There are currently about 26 million buildings...so we face refurbishing about 22 million buildings by 2050. Over half a million a year for 40 years...” A Local Example: Legislation changes are also often driven by local situations and a good example of a legislation upgrade which has caused difficulties to property owners / operators at a local level is that of the ICPE (Installations Classées pour la Protection de l’Environnement) Regulations in France. Section 1510 of the ICPE regulations was adopted in September 1986 following a major fire in an industrial area of Toulouse. Section 1510 was put in place to regulate the storage of combustible materials within warehouse areas and sets out threshold limits for the volume of combustible materials permitted to be stored within a defined warehousing volume unless an ICPE permit is held and numerous (often non-standard) fire protection measures are in place. 1510 originally only applied to individual operators; however, in August 2000 the Ministry of Environment stated that the classification thresholds should apply not only to individual operators but to the accumulated “global” storage across a property. This change in the interpretation of regulations has led to a huge increase in the number of properties requiring ICPE Permits and has also had the effect of ICPE Administrators placing the responsibility for compliance with permit conditions at the “global” level with property owners where the individual storage conditions of the tenants/operators fall below the 1510 classification levels. Implementation of the “global” classification has slowly been adopted and it is only in recent years that the ICPE Administrators have started to strictly regulate ICPE 1510 for existing building stock. The process of completing a permit application and agreeing permit conditions has become lengthy and challenging as owners struggle to negotiate a commercially acceptable solution with local authorities on a site by site basis. In general it has been found that significant management time and capital expenditure is required in order to bring properties into compliance with the conditions of ICPE 1510 permits and as a result property owners are increasingly looking to alternative management solutions such as restricting site operations rather than have a non compliant building within their portfolio or finding the necessary management time and capital to achieve compliance with permits. Our examples of the EU Energy Performance of Buildings Directive and ICPE 1510 permitting scenario are just two of many recent environmental legislative changes which have had a significant impact on the property industry and in particular existing building stock. They serve as a warning to property investors that the requirements of new environmental legislation cannot be underestimated and highlight the growing need for environmental risk management to be considered both at the point of acquisition and integrated into the post- acquisition asset management programme. “Environment” is no longer a box ticking exercise for property investors and should be considered in any future investment risk management strategy.